OUTLOOK 2021

Asset Management and Investment Funds

A lot more asset manager M&A to come

Asset managers buying asset managers and businesses for their own account has been part of the narrative for asset managers over the last few years. This has been driven by the need to diversify or plug gaps in portfolios, to drive efficiencies, to keep up with competition and to facilitate succession planning. The pandemic has not had an impact on the volume of this M&A and in fact has provided an opportunity for the industry to look at tactical acquisitions as well as a desire to maintain resilience and to continue to address some of the more long term operational drivers. We’ll be seeing bolt-on activity right across the supply and value chains and addressing outsourcing challenges. Technology platforms, greater access to alternatives, better responsible business and ESG will all lead to further transactions, globally. Through our cross border asset manager transactions group we have a wealth of experience and insights into these types of transactions and can share these learnings with asset managers.

Private assets will democratise

Interest in private assets (private equity, real estate, infrastructure, private credit and other unlisted/illiquid assets) is not new, but has traditionally been the domain of highly sophisticated, institutional investors. That is set to change. The post-COVID world will be in urgent need of capital to support public-sector efforts to boost the global economy through investment in areas such as infrastructure projects and SME finance. One facet of this will be increased governmental and regulatory motivation to facilitate broader access to private assets for non-traditional investor classes – democratisation of the asset class. Coupled with this will be increasing demand from retail investors (directly and – crucially – indirectly via their pension schemes) for higher returns. Particularly if interest rates remain at historic lows, or even turn negative. There are significant hurdles to overcome before this can be achieved, such as the (over) emphasis of regulators and intermediaries on liquidity as the prime criterion for retail suitability. But 2021 will see significant steps towards allowing broader access to areas previously reserved for the institutional community.

Culture

The industry is working in many ways around cultural and related issues including: conduct risk, corporate governance and the role of NEDs, diversity and inclusion, enforcement, environmental social and corporate governance, fit and proper issues, market abuse, mental health, Me Too, sexual harrassment, non-financial misconduct, promotions and remuneration, SMCR and whistleblowing/speak up culture.

The culture of organisations can vary greatly and culture is an all-encompassing concept that can be tricky to define. Culture has previously been defined as the collective assumptions, values and beliefs that shape the behaviour of a business. Arguably, the culture of a firm is its greatest asset and organisations need to be able to nurture and protect this asset. They need to be able to measure their culture and potentially benchmark their culture against peers.

The regulators have discussed how a clear and meaningful purpose at the centre of a firm’s business model and strategy is an important part of adopting a healthy culture. They see this as key in reducing potential harm to consumers and markets.

Outsourcing will play more of a strategic role

In recent times, the outsourcing conversation has tended to focus on cost reduction in the middle and back office processes and that will continue. But as we suggested in our joint study with Bloomberg The Future of the Asset Management Industry AM2025 — it’s coming to the front office as well. Open source analytical and code libraries are proliferating, and access to the massive amounts of data created by the online world is increasingly open. There is a balance to strike between the dependence on armies of in-house coders and data scientists, and a greater use of ready-made tools and external resources. This will have critical implications for portfolio managers who will have to become more familiar with this world.

Hand-in-hand with increased use and dependence on data comes an appreciation of an increasing data-risk profile. With data-risks featuring high on lists of worries it has the potential to rise to the top of that worry list. The focus on cost reduction will also increase the need for employment and HR advice. Asset managers will push fee pressure down to administration and infrastructure providers, triggering a wave of consolidation. As asset managers continue to experience fee pressure, they will increase scrutiny of their infrastructure providers (ie custodians, depositaries, administrators and ManCo providers).

Accountability on stewardship issues

Expectations of asset managers in terms of the value they provide investors, transparency, the management of conflicts of interest and governance generally have all increased. These expectations are being set by both investors and regulators and in some cases, the managers themselves. The themes raised are common to many of the decisions and approaches that asset managers are required to consider every day. Examples of decisions that might engage questions related to one or more of value, conflicts, transparency and governance include stewardship and shareholder engagement, participation in litigation opportunities, fee levels across funds and share classes, asset valuations and significant disposals. While some assets managers have adjusted their own expectations of themselves (see Culture above), we predict that those that are perceived not to have done so (and their senior managers) will face increased risk of regulatory intervention and/or investor action. They will also see mounting pressure to demonstrate effective stewardship on issues that impact value and governance.